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March 17, 2013

Wrapped Up in a Blanket: Pros and Cons of Family Blanket Policies

Insuring multiple homes can be a challenge for some families, particularly when those residences are spread among several states. Assuming different insurers on the properties, there may be a hodgepodge of coverage forms, each with unique policy terms, conditions and limits.

Some families have been able to meet this challenge with a family blanket policy. Such policies essentially replace multiple property insurance policies with one document featuring a single financial limit covering all residences.

The idea of this insurance approach derived from commercial property insurance, where a large business insured multiple locations it owned or leased via a single policy. Now some personal lines carriers are essentially offering the same type of coverage to their customers.

While this approach certainly reduces the nagging confusion caused by several different policies, there are caveats to consider. Chief among them is that two (or more) residences in close proximity to each other generally are not good candidates for this insurance approach. The reason is that insurers actuarially seek a significant spread of geographic risk when underwriting blanket policies, which is narrowed by having two homes subject to the same loss event, such as a hurricane or wildfire.

Spread of Geographic Risk

This factor became clearer following a recent discussion with Timothy O’Brien, private client practice leader at insurance brokerage Cook Maran & Associates. Tim pointed out that a single hurricane could damage both a house in the Hamptons and another on the shore in Connecticut. “But if you have one home in the Hamptons, another in the Rockies and another in Florida, the spread of risk is such that no single event could cause damage to them all at the same time,” Tim said. “Barring, of course, a giant asteroid hitting the planet,” he added.

We spoke right after a blazing meteor exploded above Russia, I should point out.

Despite the growing popularity of blanket property policies, there are other drawbacks to consider, and many personal lines carriers are rightfully wary of these complex arrangements. There can be complications when a family office combines family members under one policy. For example, has enough coverage been purchased to adequately cover each family member? If not, how will the limit be divided and at what percentages? And how can the premium each pays be appropriately allocated?

Nevertheless, Tim is bullish that blanket property policies are of great utility. “Unlike traditional property insurance, blanket property insurance provides single protection for multiple properties, rather than the customary process of insuring each property via separate policies,” he said. “You’re buying a consistent level of protection for different properties, with an aggregate covered property limit that represents all these residences, ancillary structures and personal possessions.”

By doing away with multiple policies, owners can sometimes eliminate potential gaps in coverage which would otherwise make them vulnerable to uncovered losses. “You’re no longer dealing with varying coverage forms state by state,” Tim said. “There’s great peace of mind in knowing that all the properties are covered by the same terms. These and other factors explain why blanket policies are a growing trend in the high-net-worth marketplace.”

Flexibility? Yes, but Also Simplicity

Other advantages include the ability to tailor the financial limits of the policy to coverages that may be difficult to acquire in certain regions, such as flood, wind, earthquake and mold.

Family blanket policies are also flexible. For example, some insurers will underwrite a single policy covering the homes of several family members, making the concept ideal for multi-generational families whose members reside in several states. For this to be feasible, however, the entity created to purchase the insurance must have an insurable interest in each property covered in the blanket.

Although this strategy can result in lower premiums for some families due to the geographic spread of risk, Tim said its main appeal is its simplicity. Nevertheless, he warned that a specialized insurance agent or broker is needed to assist determinations on the specific coverages, financial limits of protection and an appropriate level of retained risk—the deductible.

“Instead of having different deductibles on several policies, you have one deductible on one policy,” Tim said. “Since the risk of two homes incurring a loss at the same time is reduced, the homeowner can raise the deductible and achieve cost efficiencies. But you need a smart broker to coach one’s expectations.

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